Redirecting

Monday, October 26, 2009

Double Shot from MISH, and Other Links

Mike Shedlock is a blogger who writes frequently, with in depth and accurate assessments of economic policies and talking points. Over the past few days, he posted two pieces I want to mention here. The first is about government subsidies for pork bellies. I found this one especially interesting because I had a very similar debate with my in-laws just a week before, over the topic of milk prices. My wife's family grew up on a dairy farm, and my father in-law was complaining that milk prices are too low right now. I responded that it's impossible for milk prices to be too low, because they are a commodity, and if they are too low, then farmers should stop making milk. Now, milk is slightly different, because there is a long lead time, but we agreed that the problem was government intervention in milk prices (with subsidies to compensate farmers when prices fall) which keeps weak farms in business, and maintains the status quo of OVERsupply of milk, surpressing prices. On to Mish's thoughts on hogs, emphasis mine:

"It is absurd to think the government or anyone else owes farmers a profit anymore than computer consulting corporations or real estate agencies are owed a profit.

Yes farmers have a rough life. But everyone unemployed or underemployed has a rough life now. Farmers are raising too many hogs and prices are low. The solution is to raise fewer hogs, either voluntarily or involuntarily via bankruptcy.

When government steps in and offers price supports it keeps weak producers alive when they should go out of business, it encourages more production of unwanted goods, those goods stockpile up and then finally the US government dumps the excesses on foreign markets at whatever price it can get. The latter is an enormous source of aggravation for struggling emerging market countries."

MISH also had a nice piece on the effect of government stimulus. Of course stimulus results in an increase in spending - the problem is that it results in temporary spikes which last as long as the stimulus does. We saw this with CashForClunkers, and we'll see it when the Homebuyer Tax Credit finally ends. To use an old analogy: it's like giving another shot of alcohol to a drunk. It postpones the eventual hangover, but cannot elminate it.

A related view of the same topic was expressed by David Einhorn in his remarks last week at the Value Investing Conference. Some economists say the problem following the great depression was that the Fed withdrew its stimulative/accomodative monetary policy too soon, which resulted in a double dip recession in the late 1930's. Einhorn notes:

"An alternative lesson from the double dip the economy took in 1938 is that the GDP created by massive fiscal stimulus is artificial. So whenever it is eventually removed, there will be significant economic fall out. Our choice may be either to maintain large annual deficits until our creditors refuse to finance them or tolerate another leg down in our economy by accepting some measure of fiscal discipline."

2 comments:

In times of full utilization of resources, the stimulus would crowd out private investment, resulting in less than $1 for each $1 spent.

However, during times of slack demand, or the equivalent slack private investment, this government stimulus doesn't crowd out any or only a little private investment.

This means that growth driven by government spending during times of low capacity utilization is real.

Just because the government can choose to alter this spending doesn't take away any potency from this spending.

Note that a government could simply choose to tax without spending anything. Would your model explain anything that happened in this potential regime? Under this regime the "false growth" model would mean there was "false contraction", even though there was actual and real contraction.

I like your stuff. I just have a hard time with understanding a bridge being built as having no value at all, or some form of false value.

Interesting comment, Mike. Let me ask you this: consider the Stimulus plan we currently have. part of that plan is to pay sign makers roughly $1900 per sign to make signs announcing the plan. Is there any practical value here? Of course not. Is there economic value to the maker of the sign? of course there is - but what happens when the government STOPS paying him to make these signs no one needs? it's extend and pretend - it doesn't create or sustain anything -it's like a wellfare check. does giving out wellfare checks fix the economy? no - they are a temporary patch on the economy - and when they stop, the economy stops.

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